Part 5: Challenges arising from the new accounting standards

5.1
Although the change to a new Accounting Standards Framework has been positive, there are still challenges when applying PBE accounting standards to public benefit entities.

5.2
In this Part, we discuss our concerns about some of the more substantive changes in the new accounting standards, and specific issues that we have seen during implementation.

Our concerns about some of the substantive changes

5.3
Many public entities have now reported for the first time using the new accounting standards. We are evaluating the effect of the changes and will continue to do so as all public entities apply the new accounting standards.

5.4
Overall, the transition to the new PBE accounting standards represents a positive step, although there have been some issues with implementation.

Limited guidance for classifying revenue transactions

5.5
The PBE accounting standards introduced a new standard for non-exchange transactions. These transactions, such as tax revenue, commonly occur in the public sector where funding moves but no direct goods or services are received in exchange. Previously, NZ IFRS included a standard on exchange transactions, such as the sale of goods and services, that more commonly occur in the private sector. There was no standard for non-exchange transactions.

5.6
Although it is helpful to have separate accounting standards for exchange and non-exchange transactions, there is limited guidance about how to distinguish between the two. This means that entities and their auditors are spending much time and effort trying to distinguish between types of revenue when preparing general purpose financial reports.

5.7
This issue has been most visible where revenue is received for services spanning reporting years. Distinguishing between the two types of revenue could affect whether revenue is recognised in one or more of the reporting years.

5.8
The XRB is aware of our concerns about classifying revenue in public sector general purpose financial reports. The International Public Sector Accounting Standards Board is currently carrying out a project on revenue designed to produce further guidance on how public sector public benefit entities should account for revenue. XRB staff will help the International Public Sector Accounting Standards Board throughout this project.

Conflicting requirements for service concession arrangements

5.9
In the public sector, a service concession arrangement is where a public entity (the grantor) contracts with another party (the operator) to provide a service on their behalf. The operator often makes use of some of the assets of the grantor to deliver the contracted services. Sometimes, the operator is responsible for constructing the asset. The service will usually be provided for an agreed period and at a negotiated price. For example, a public entity might contract with a private sector entity to operate a prison or a hospital.

5.10
NZ IFRS did not include a standard on accounting for service concession arrangements by the grantor. The introduction of this standard within the PBE accounting standards has provided guidance to improve accounting by public benefit entities in this area.

5.11
However, there are conflicting requirements between the new standard and another standard within the PBE accounting standards. The conflicting requirements make it difficult for public benefit entities to comply with both standards.

5.12
We and the Treasury have written to the International Public Sector Accounting Standards Board highlighting this issue and suggesting some options to improve reporting. The Board has proposed making changes to address the inconsistency, and we expect the changes to be made to the accounting standards during 2016.

Less transparency about related party disclosures

5.13
A related party transaction is a transaction where those involved have – or appear to have – a close relationship. There is a risk that those parties might make an agreement on terms that are more favourable than would occur in an arm's-length transaction. The accounting standard for Tier 1 and Tier 2 public benefit entities about related parties provides guidance about how to disclose those relationships to the users of general purpose financial reports.

5.14
NZ IFRS included a standard on accounting for related party transactions. The new standard within the PBE accounting standards no longer requires disclosures of related party transactions that take place on normal terms and conditions.

5.15
Auditing of related party disclosures has become more challenging, particularly when assessing whether related party transactions are on "normal terms" and how those judgements are made and supported.

5.16
Overall, we expect the new standard will mean fewer disclosures of – and less transparency about – related party transactions by public benefit entities in the public sector. As a result, there is a risk that the new disclosure requirements will affect the transparency of general purpose financial reports in the public sector.

Other implementation issues

Performance information requirements and guidance could be better

5.17
Many public entities are required to report on their performance. Performance information covers service delivery and achievements. It is an important part of the accountability documents prepared by many entities in the public sector. Performance information needs to be combined with financial information to convey a coherent and complete picture about the public entity's performance.

5.18
In our view, the requirements and guidance about performance information that is included in generally accepted accounting practice needs to be updated and improved to ensure that performance information meets the needs of users for accountability and decision-making purposes.

5.19
The XRB is working on a standard about reporting performance information that will become part of generally accepted accounting practice. An "exposure draft" of this standard has recently been released for public comment. In our view, it is important for this standard to be flexible enough for performance reporting in the public sector to continue to evolve.

Guidance for determining whether an entity controls another entity is not easy to apply

5.20
Guidance for determining whether an entity controls another entity is important. It affects not only when it is appropriate for an entity to prepare consolidated financial statements but also which entities are public entities. If an entity is not classified as a public entity, the Auditor-General is not its auditor. This matter can be particularly challenging when the entities are charitable trusts or limited partnerships.

5.21
NZ IFRS contained guidance for determining whether an entity controls another entity. The PBE accounting standards also have a standard for assessing control. However, neither of these standards have been easy to apply. This has sometimes resulted in a lack of clarity.

5.22
We are pleased to see that the XRB is working on a new PBE accounting standard to update guidance on this matter.

Conceptual framework is needed

5.23
We consider it important to have a conceptual framework to help public benefit entities interpret requirements in the accounting standards. Such a framework is particularly useful where there is no directly applicable accounting standard. It is also important for helping standard-setters to create new accounting standards.

5.24
We are pleased to note that the XRB is preparing a conceptual framework for public benefit entities, based on the International Public Sector Accounting Standards Board's conceptual framework.